Employee Leave: What Do We Need to Know About Switching to PTO?

We’re considering moving to a Paid Time Off (PTO) program instead of our current separate bundles of vacation, sick time, and personal leave, and we have a bunch of questions. When companies make this switch, do they just add up the number of days and then lump them all together? Impose any restrictions on taking the time off? Allow people to borrow from the next year? Allow days to carry over to the next year? Pay out all the PTO when the employee leaves? Thanks so much. — A.B. in Calabasas

Our HR Management & Compliance Report: How To Comply with California and Federal Leave Laws, covers everything you need to know to stay in compliance with both state and federal law in one of the trickiest areas of compliance for even the most experienced HR professional. Learn the rules for pregnancy and parental leaves, medical exams and certifications, intermittent leaves, required notices, and more.

We asked Mary L. Topliff to field this benefits question for us.

Converting from a policy of separate vacation, sick, and personal leave to a combined Paid Time Off program should only occur after careful consideration of a wide variety of issues. They generally break into the categories of ‘legal’ and ‘practical.’

Legal Considerations   

Since you don’t have to provide vacation, sick, and personal leave, employers are legally entitled to change the terms of these programs. However, because time-off benefits are valuable to employees, you must give them reasonable advance notice before a significant change goes into effect. The courts have not defined ‘reasonable notice,’ but a general guideline is at least 30 days.

Another consideration is California state law’s interpretation of vacation time benefits and the resulting requirements. Any time-off plan that constitutes or includes vacation time benefits, such as a PTO plan, must comply with these requirements, even if PTO can be used for sick time or other reasons. Furthermore, personal holidays are usually viewed as vacation time for purposes of these legal requirements, especially if they can be taken at the employee’s discretion. Therefore, be sure that the PTO plan will pass muster under California’s vacation policy requirements.

Under California law, once vacation time or PTO is accrued, it is viewed as wages earned by the employee and thus, any unused accrued time cannot be taken away; it must be paid out on an employee’s termination. Taking this concept one step further, it is unlawful to have a ‘use it or lose it’ vacation/PTO policy, such as limiting or prohibiting the carryover of accrued vacation/PTO time at the end of the year. However, a cap can be placed on the amount of vacation/PTO time accrued, beyond which no additional time accrues until the account balance drops below the cap. The cap must be at least 1.75 times the annual accrual amount to be approved and enforced by the California Division of Labor Standards Enforcement (DLSE), the state agency regulating wage and hour requirements. An alternative approach is to cash out unused vacation/PTO time at the end of the year or some other appropriate period of time.

Another California legal requirement is something known as ‘kin care,’ in which employers must allow employees to use one-half of their annual accrual of sick time for time off due to an ill family member, including a domestic partner. Most PTO plans allow the employee to use accrued PTO time for any reason, including a family member illness, which would comply with this requirement. Cautionary note: employers may not take a disciplinary or adverse action against employees who take time off for this purpose.

When transitioning from a sick and vacation program to a PTO program, all accrued vacation and personal holiday time for each employee must be transferred to the PTO bank. However, you don’t have to transfer accrued sick time to a PTO program because it is not viewed as wages earned, but rather, paid time that is contingent on various factors occurring (namely, that the employee or family member is ill and the absence is authorized).

Keep in mind that when sick time is converted to PTO time, all of the PTO time is considered vacation time for purposes of the accrual, carryover, and payout requirements. Determining how much sick time will be transitioned to a PTO program raises various practical concerns.

Practical Considerations

The bottom-line cost of a PTO program can be considerably higher than using separate vacation and sick leave banks due to the carryover and payout requirements. Of course, the upside potential is that unscheduled absences, and the sometimes vast costs associated with them, will decrease as employees use PTO time more judiciously than sick time. That’s because unused sick time is not paid out on termination.

Before transitioning from the vacation/sick bank model to a PTO program, be clear about your motivation and desired outcome. If cost savings is the goal, estimate the cost of the current program in terms of payout of vacation accruals, average amount of vacation time taken, and the amount of sick leave that has been used. Then, look at different accrual rates that may be used for a PTO program and determine the costs associated with each of them. If cost savings may be a long-term goal, it is better to convey that expectation at the outset to executive management.

To decide on the accrual rate for the new PTO program, the easiest option is to simply combine the current vacation and sick time accruals into the PTO program. However, this may not be cost effective when sick leave is converted to PTO. Some employers have generous sick leave plans that can make it cost prohibitive to convert to a PTO plan. Although accrued sick leave is not required to be converted, there are untold employee and public relations issues that can arise if employees perceive that the employer is taking away benefits that would cover them in a time of need.

If employees have significant sick leave accruals, consider the feasibility of a ‘grandfathering’ period in which the employees maintain a separate sick leave bank for some period of time after the PTO plan is implemented and beyond which the remaining sick time is lost. Or, offer short-term or long-term disability insurance plan benefits as a way of continuing to provide wage replacement income during periods of extended illnesses.

Although all accrued vacation and personal holiday time must be converted to PTO, this does not mean that the same vacation accrual rates need to be converted to the new plan. For example, an employee may have 20 days of accrued vacation time but the PTO plan provides that this employee may accrue a maximum of 15 days. In this case, the employee would have 20 days of vacation converted to PTO, but would not accrue any more PTO time until the PTO bank fell below 15 days.

There are a wide variety of other issues that should be considered in setting up a PTO plan, including advance notice and approval, tracking and reporting, how PTO relates to attendance guidelines, and the increments of time in which PTO can be taken.

Mary L. Topliff is principal of the Law Offices of Mary L. Topliff in San Francisco.

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